Fonterra forecast $7 payout

The co-op also confirmed it is holding its current forecast farmgate milk price for the 2012/13 season at $5.80kg/MS, and a forecast dividend of 32 cents per share, amounting to a cash payout of $6.12 for a fully shared-up farmer.

"We are maintaining our current season forecast but advising farmers to be cautious in managing their budgets as we have seen a sharp drop in milk volumes as a result of the drought, and recent declines in GlobalDairyTrade auction results," says chairman John Wilson.

Fonterra also confirmed a higher advance rate schedule, with an opening rate of $5kg/MS, reflecting the higher forecast farmgate milk price for 2013/14.

The board will announce its forecast cash payout - which comprises the forecast farmgate milk price and dividend for the 2013/14 season - in July when Fonterra's budget is completed and approved.

Wilson says the higher forecast milk price for the new season reflected continuing strong international prices for dairy.

"The general consensus is that dairy commodity prices have peaked but will continue at or near current levels until the fourth quarter of 2013. Most external forecasts point to prices remaining relatively strong through 2014."

Commenting on the advance rate increase Wilson says: "A stronger forecast farmgate milk price, supported by our improving cash flows and strong balance sheet, means we are able to lift the advance rate for the new season to ensure farmers receive higher payments for their milk early in the season.

"A large proportion of our farmer shareholders have experienced drought conditions, which have had a significant impact on feed costs and production, resulting in early drying off of their herds.

"A higher advance rate at the start of the new season will help our shareholders in managing their farming businesses to ensure an ongoing supply of high quality milk to the cooperative," says Wilson.

Market factors

Chief executive Theo Spierings said the fundamental supply and demand balance has shifted: "Global milk production growth is slowing as a result of unfavourable weather conditions in many key milk production regions.

"Although we are seeing modest production growth in the USA, recent cold conditions in Europe have had a negative impact on crops and dairy, and the outlook remains mixed.

"Milk production growth in 2013 for the top 15 exporting countries is projected at 0.5% or 1.2 billion litres - well below the 1.8% (4.5 billion litres) growth levels we saw in 2012.

"In general, the global economic outlook remains steady but with some downside risk. In the USA modest growth continues, while China has managed a soft landing with the consensus on growth at around 7.8%.

"While we expect most farmer shareholders will welcome a higher milk price, we will continue to closely monitor these key factors contributing to Fonterra's opening forecast for the 2013/14 season."

Spierings says Fonterra is preparing its budgets for 2014, however, shareholders and unit holders should expect the strong uplift in international dairy powder prices to create a more challenging environment for Fonterra's earnings in the first half of the 2014 financial year.

Raw milk regulation change

Fonterra welcomed changes to raw milk regulations that will apply from June 1.

"This season is the last when competitors can cherry pick when they get milk during the season, and it has coincided with the drought and the recent higher export prices.

"This meant Fonterra was required to supply large volumes of milk to competitors when milk flows were very low because of the drought, reducing the utilisation of our factories.

"At current prices, we estimate that the milk we have supplied our export competitors from March to May will cost our shareholders about $25 million in lost earnings, amounting to 1.5 cents per share in lost earnings.

"At the same time we estimate that due to the drought the benefit to our competitors is far greater, with the potential to add between 5 – 30centre per kg/MS to their performance.

"As this year's drought has shown us, the Government did the right thing in changing the raw milk regulations last year," says Wilson.